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Interest rate commentary for 19 Sep – 23 Sep 2016

This week it was all about central banks. The RBA, RBNZ, Bank of Japan and the US Fed all prognosticated this week and the result was to drive bond yields lower.

The RBA started the week with a new governor, Philip Lowe. Mr Lowe did well in his first utterings but not well enough to avoid the headline of his quote regarding “inflation nutters”. The short take-away is that the RBA is still a reluctant rate cutter and markets have priced a cash rate cut by November as only a 1-in-5 chance. Nonetheless, markets glossed over the RBA comments and gave even more scant regard to the RBNZ’s comments as they waited for the big bazookas of the BoJ and the US Fed.

Close Week
Cash Rate%   1.50
90day Bank Bill%   1.74     0.10     1.74     1.73
Aust 3y Bond%*   1.56     0.12     1.65     1.52
Aust 10y Bond%*   2.01   -0.11     2.18    2.00
Aust 20y Bond%*   2.60   -0.14     2.78    2.60
US 2y Bond%   0.75   -0.02    0.78     0.75
US 10y Bond%   1.62   -0.07     1.71     1.62
US 30y Bond%   2.34   -0.10     2.46     2.32
iTraxx 102.5    3.0   108.5     98.0
$1AUD/US¢ 76.24   1.30   76.75   74.79
* Implied yields from Dec 2016 futures

The BoJ surprised markets that were expecting further quantitative easing measures. They got a new policy slant on things when it said that it would now target the yield curve in order to keep 10 year JGBs at around 0.00% rather than simply buying a fixed quantity of bonds each month. Equity markets rallied hard after the announcements but bond markets were somewhat perplexed. It did not help matters that Thursday was a holiday in Japan.

So, it was left to the US Fed that found another way to avoid hiking interest rates. The non-action by the Fed had some suggesting that chair Janet Yellen has shredded her credibility after talking tough on rate rises over past months. Equity and bond markets rallied hard after the meeting results.

Over the week 10 year government bonds fell in Australia (11bps), US (7bps), Germany (10bps) and most other markets. Yield curves generally flattened as markets once again became happy with the idea central bank actions would keep yields at the long end low.

Semi-government bonds generally kept up with their Federal counterparts but, other than a couple of small transactions, things were quiet in the sector.

There was a bit of movement at the corporate bond station and both MyState and CUA issued new bonds, but with very different characteristics. One of the corporate risk indicators, iTraxx, had its six-monthly revamp and, despite no changes to its constituents, the default risk index move higher.

ASX-listed hybrid securities and ASX-listed notes generally went against the trend of lower yields this week, although within either sector, there was considerable variation. See our tables and charts for more.

Term deposits in Australia had a quiet week with few changes but there were two changes made by one deposit-taking institution which were hard to miss simply because of their magnitudes.

The $AUD rose strongly during the week, closing at $US0.7624 up 1.30 US cents on the week.

In our key stories for the week we explain the Kangaroo bond market, how family trusts and SMSFs are the new tax planning tools and discuss how investors are underestimating the risk in hybrid securities.

We hope you enjoy reading this week’s YieldReport.

August 2016 monthly interest rate commentary

The first week of August turned out to be the busiest of the month in terms of trading. The local bond market started the month reading reports about weak US Q2 GDP data, which was followed by the Melbourne Institute’s inflation reading of 1.0%. Both sets of numbers had bond investors pressing their “buy” buttons and the RBA decision to cut cash rates by 25bps the following day did not alter that view.

Offshore, UK yields fell after the BoE pressed nearly every button on its monetary policy stimulus console. Things did not quite go to plan with its asset purchase programme and it failed to fill its buy order. Investors refused to play ball and …..Click here to read more

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